How to Use an Appraiser to Close a Deal

Although it is sometimes done, using full, formal appraisals in deal-making situations is usually not prudent.

This is because what counts in deals is whether buyers and sellers can negotiate mutually acceptable prices and terms; not what an outside appraiser thinks a business is worth. Appraisers tend to focus on fair market value: the value to a hypothetical willing buyer and any willing seller. Deals, on the other hand, involve investment value: the value to a specific buyer and a specific seller based on their individual situations.

So how can an appraiser be most useful in deal-making situations? The following suggestions assume that a client has a competent team of advisors in place: an attorney, an accountant, and an intermediary, and that buyer and seller have met and are exploring the possibility of a transaction.

Appraisers can:

1. Ask the key question: “Why is this a good deal?” Appraisers should be completely objective since they have no vested interest in the outcome.

2. Ask the second key question: “What are the risks and how will you handle them?”

3. Provide guidance on reasonable asking and offer prices based on simple value range calculations. This analysis and conclusion is analogous to feasibility studies.

4. Provide reassurances with data on prices of comparable transactions and the rate of return implied by a given value. (For example, a business earning $25 pre-tax on an investment of $100 has a 25% rate of return and a pre-tax price/earnings multiple of 4, which is within norms.)

5. Provide suggestions as to how to bridge the gap between the buyer and seller by structuring transaction terms, contingencies, etc.

6. Depending on the client's and professional team's needs and preferences, participate in negotiations in various roles.

7. Provide formal fairness opinions.

Professional ethics prohibit an appraiser from acting both in a capacity to develop a formal opinion of value which will be used by third parties and a consultant/advocate to provide advice and limited valuation information for internal use in a single situation. For example, if the appraiser helps negotiate the buy out of minority shareholders, it would not ethical to issue a fairness opinion. In such a case the appraiser would recommend another independent appraiser for that assignment. It can quickly be determined at the engagement's outset which role is appropriate and most beneficial. Appraisal ethics require when an appraiser is acting strictly as an appraiser and working solely on valuation issues, to charge only for their time in deal-making situations, with no contingent fees.

This has an important implication: in most deal-making situations, the appraiser's role should be limited and carefully structured. Often, appraisal advice in deals that have specific parties and issues defined require only several hours here and there of time, with the total involvement of the appraiser generally no more than a few days. If other private investment banking services are required to initiate or complete a transaction, such services should be discussed at the initial meeting and normally can be developed to meet the specific needs of the principals.